BAE warns on political influence in EADS

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The French and German governments each effectively control 22.5 per cent of EADS

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BAE insists that the combined entity's defence business would have to be based in the UK

The French and German governments each effectively control 22.5 per cent of EADS

People close to BAE said it would give up on the deal if it is not a commercial company

BAE Systems has insisted it will walk away from talks with EADS unless the combined European champion in aerospace and defence was allowed to operate as a normal company without political interference.

BAE is also insisting that the combined entity's defence business would have to be based in the UK if the plan, news of which was leaked on Wednesday before the structure was finalised, is to go ahead.

The management of EADS has indicated it would be willing to de-politicise the company, but it remains far from certain that Paris, in particular, and Berlin would agree to give up their strategic stakes.

The uncertainty over the fate of the deal as well as the lack of clarity on possible cost-savings and strategy prompted deep investor scepticism. Shares in EADS fell 10.2 per cent to €25.2 and BAE dropped 7.3 per cent to 337.1p.

In hastily arranged conference calls, several major BAE investors expressed concerns over the tie-up. They warned that they would become sellers if BAE was unable to shed more light on its long-term dividend policy and the degree of French and German influence over the merged entity.

People close to BAE said the company would give up on the deal if it did not create a commercial company, with a balanced board, free of political influence. The UK-based company's talks with EADS which started in March came after BAE considered a combination with Northrop Grumman of the US or a tie-up with engine maker Rolls-Royce. Neither however was as attractive as a deal with EADS, which would give BAE a strong balance sheet and a diversified portfolio in defence and civil aerospace, one person close to BAE said.

BAE and many analysts see the French government as the biggest potential obstacle in the way of the deal. However, both companies, believe Francois Hollande, the socialist president, could be more amenable to a deal than his predecessor, Nicolas Sarkozy, a close ally of Dassault, BAE's and EADS's fiercest French competitor.

Tom Enders, who became chief executive of EADS in May, wants to use the deal to reduce the level of political influence of the French and German governments, whose involvement has lost EADS contracts and dictated key executive appointments, said people close to the company.

The French and German governments each effectively control 22.5 per cent of EADS, but Mr Enders wants their shareholdings in the combined entity to fall below 10 per cent.

EADS is proposing that the French, German and UK governments would each have a golden share, allowing them to block hostile takeovers but no additional veto rights.